Drop

After weeks, nay months, of rising, the stock market is off yesterday/today. As of this writing, the Dow Jones Industrial Average is down over two hundred points (2.2%) from Tuesday’s all-time high and the S&P 500 Index (a better indicator of the overall economy) is off by a little more, about 2.6%. I had expected even more of a drop-off today, somewhere in the 3% range. Regardless, this precipitates three questions:

1) What should we do? Nothing, really, at least not in the ‘knee jerk reaction’ kind of response. The whole point of a long-term investment plan is to stick with your original objective, and tweak it if necessary. If you have an account that you are managing yourself (like a 401k or 403b) and you have been reading these commentaries, you have hopefully been rebalancing over the last few months and declines won’t hit you as much.

2) Is it time to go to cash? No. But it is time for a gut check. About a month ago, in all but my most aggressive clients’ accounts, I added a managed futures position (no more than 5% in some accounts) with the sole purpose of smoothing out declines. Note that I did not do that in the aggressive accounts as those are generally IRAs and the whole point of that objective is for growth and you must take the good with the bad, rebalancing (and also ideally contributing more) along the way. If you are positioned for the long-term, stay committed.

3) Is this the beginning of a long bear (down) market? I don’t believe so. There are a lot of moving parts in the world’s economy and a few of them (the United States Federal Reserve’s stimulus potential, China’s factory orders, Japan’s 7%+ overnight market drop) are causing a lack of confidence in our own continuing recovery. And, as I’ve said before, we should expect a healthy pullback (5-7%) every few months in the stock market. This is part of that necessary, and healthy, volatility.